Research essential for financial stability in digital era, Scotti says
Chiara Scotti, Deputy Governor of Banca d'Italia, underscored the vital role of economic research in navigating financial stability and regulation challenges. Speaking at a conference, she highlighted the need to adapt models and supervision to rapid digitalization and non-bank intermediation.
Digitalization reshapes bank runs and policy transmission
Chiara Scotti opened the conference by posing critical questions on evolving financial intermediation, emphasizing that traditional models are becoming obsolete.
She highlighted how digitalization has fundamentally reshaped banking, enabling instant fund movements 24/7 across banks and to non-bank intermediaries.
This transformation alters depositor behavior during stress, as seen in the 2023 US bank turmoil and Credit Suisse failures, where rapid deposit outflows were observed.
Digitalization also increases deposit sensitivity to interest rate changes, accelerating monetary policy transmission and impacting banks' funding costs.
Banca d'Italia research shows euro area digital banks shifting to higher-yielding term deposits during tightening cycles.
Scotti noted that AI-based tools could either reduce panic through transparency or increase bank run risk by facilitating depositor coordination, while also exposing banks to new operational risks like cyber threats.
Unrealized losses and collateral challenges
The interaction between monetary policy tightening and financial stability is a core conference topic.
Rising policy rates have led banks to incur significant losses on fixed-income securities portfolios, pressuring balance sheets.
Even without immediate solvency risk, mark-to-market losses eroded regulatory capital, constrained lending, and decreased collateral value, limiting market-based liquidity.
The 2023 US banking stress demonstrated that large unrealized losses, especially with low capital buffers and uninsured deposits, can undermine confidence and trigger runs.
Banca d'Italia research shows how banks' securities holdings and capital buffers shape credit supply responses to monetary shocks, underscoring the interconnectedness of monetary and prudential policies.
Shadow banking's growing systemic footprint
The rapid expansion of non-bank financial intermediation (NBFI) has reshaped financial systems, with activities shifting from regulated banks to asset managers and investment funds.
While this broadens funding, it raises financial stability concerns due to NBFIs operating without comparable regulation or public safety nets, as evidenced by the 2022 UK gilt crisis.
Assessing the extent of interconnections between banks and NBFIs, particularly in private credit markets, is now critical for investors and regulators alike.